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Inflation's role in optimal monetary-fiscal policy

Author: Eric Michael Leeper; Xuan Zhou; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2013.
Series: Working paper series (National Bureau of Economic Research), no. 19686.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
We study how the maturity structure of nominal government debt affects optimal monetary and fiscal policy decisions and equilibrium outcomes in the presence of distortionary taxes and sticky prices. Key findings are: (1) there is always a role for current and future inflation innovations to revalue government debt, reducing reliance on distorting taxes; (2) the role of inflation in optimal fiscal financing increases  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Eric Michael Leeper; Xuan Zhou; National Bureau of Economic Research.
OCLC Number: 865085489
Notes: Title from http://www.nber.org/papers/19686 viewed December 12, 2013.
"November 2013."
Description: 1 online resource (47 pages) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), no. 19686.
Responsibility: Eric M. Leeper, Xuan Zhou.

Abstract:

We study how the maturity structure of nominal government debt affects optimal monetary and fiscal policy decisions and equilibrium outcomes in the presence of distortionary taxes and sticky prices. Key findings are: (1) there is always a role for current and future inflation innovations to revalue government debt, reducing reliance on distorting taxes; (2) the role of inflation in optimal fiscal financing increases with the average maturity of government debt; (3) as average maturity rises, it is optimal to tradeoff inflation for output stabilization; (4) inflation is relatively more important as a fiscal shock absorber in high-debt than in low-debt economies; (5) in some calibrations that are relevant to U.S. data, welfare under the fully optimal monetary and fiscal policies can be made equivalent to the welfare under the conventional optimal monetary policy with passively adjusting lump-sum taxes by extending the average maturity of bond.

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